For the second year in a row, Nintendo is posting an operating loss after the less-than-stellar sales of its new Wii U were unveiled. Though the newly-posted loss took investors by surprise, the conditions behind it actually make an equally surprising amount of sense.
The loss posted was in the amount of $220 million, which interestingly enough was the same amount Nintendo was forecasting to profit for the year. Meanwhile, 19 separate analysts had reached a consensus figure of 12.1 billion yen (around $133 million U.S.) in profit for the year. What made this an even nastier surprise for all concerned was that this was in an environment of unusual weakness for the yen, making exports more attractive than normal. Given that Nintendo sells better than 75 percent of its products as exports, this should have been prime conditions in which Nintendo could operate.
But while some were surprised by the report, the underlying conditions in which it was generated make for a perfect explanation. Nintendo's primary market, casual gaming, has been infiltrated in recent months by smartphones and tablets, which offer extremely inexpensive--sometimes even free--games for users to take with them anywhere they go. Several new platforms are also emerging that allow for inexpensive gameplay as well, and that's putting quite a bit of pressure on the Wii U line. This pressure is compounded by the fact that there have been delays in several major software titles, forcing Nintendo to issue unconventional apology statements and appeal to gamers' patience, which as a marketing tactic, isn't a real bell-ringer to get people to go out and buy.
The combination of sagging hardware sales, and sagging software sales, on what was expected to be Nintendo's biggest sales draw added up to a negative overall result. Though the conditions in gaming overall, coupled with the slumping economy, added up to negatives in the short term for Nintendo, that didn't stop Nintendo's president Satoru Iwata from planning a substantial return to profitability thanks to a huge lineup of incoming software titles, but this confident assertion came amidst not only weaker Wii U sales, but also a projected slump in 3DS sales as well.
Nintendo has a lot more competition than it used to. In the last generation, the console wars were comprised mainly of Nintendo, Microsoft (News - Alert) and Sony. But with smartphones and tablets throwing their collective hats in the ring, and unusual Kickstarter projects coming in from the sides, it's putting Nintendo under a lot more pressure than they likely saw coming. How to get around this? Nintendo needs to show itself as a clear value proposition, distinctly better in some way than their growing army of competitors, and price doesn't look to be the vector at which they can compete.
It remains to be seen if Nintendo can pull back from the brink, but they certainly have the intellectual property and loyal fan base to pull the job off in the end.
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Edited by Brooke Neuman